Financial Regulatory Forum

Fannie, Freddie to clear interest rate swaps

March 12, 2010

   By Ann Saphir
   BOCA RATON, Fla., March 11 (Reuters) -   Fannie Mae and Freddie Mac, the mortgage-funding giants that were seized by the government in September 2008, will start using central counterparty clearing this year in a move that could mark a seismic shift in the $400 trillion global swaps market.
   The administration, regulators and lawmakers want to shift more derivatives — seen by some as a cause of the financial crisis that deepened the worst recession since the 1930s — into clearinghouses, where they may pose less of a systemic financial risk. Clearers stand between trades.
   But dealers profit from the system as it stands now, and Commodity Futures Trading Commission Chairman Gary Gensler on Thursday painted them as reluctant to shift from the opaque world of off-exchange derivatives to regulated clearinghouses, such as those run by CME Group Inc <CME.O> and LCH.Clearnet.
   The decision to move Fannie and Freddie’s combined swaps portfolio — among the largest in the United States at $3 trillion — to clearing gave notice the government is putting its money where its mouth is.
   “You can’t kick and scream anymore because I am buy-side,” Martha Tirinnanzi, chairman of the Federal Housing Finance Agency’s clearinghouse working group, told reporters after a panel at the Futures Industry Association’s annual meeting here. “It will be a signal to the sell-side that this market has changed.”
   The agency has run the housing lenders since they were made wards of the state, and has been studying central clearing for the last 10 months as a way of mitigating credit risk.
   About 75 percent of the combined portfolio of Fannie Mae <FNM.N> and Freddie Mac <FRE.N> is standardized enough to be eligible for clearing, she said.
   “We are moving to central clearing,” Tirinnanzi told the panel. “We expect to be there within months.”
   The agencies will begin by moving newly executed swaps — used to hedge their mortgage portfolios — into clearinghouses, she said. Eventually all clearing-eligible swaps will be warehoused at a regulated clearinghouse, she said.
   The agencies have tested their portfolios with Nasdaq OMX Group Inc’s majority-owned clearinghouse, CME Group and LCH.Clearnet, she said, but they have not yet decided which to use. ((Reporting by Ann Saphir; Editing by Gary Crosse)) ((ann.saphir@thomsonreuters.com; +1-312-408-8592; Reuters Messaging: ann.saphir.reuters.com@reuters.net)) Keywords: FANNIE FREDDIE/CLEARING 
  
Thursday, 11 March 2010 23:48:57RTRS [nN11247530] {C}ENDS

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